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Where Has All the Common Sense Gone?

Edward P. Kinsey, Co-founder and former CFO Ariba, Inc.

Where has all the common sense gone?
I wish it was as simple as being picked by
young girls as Pete Seegers 1960s song
suggests in his answer to Where have all
the ?owers gone. We live in a business
era when logic prevails as a rare event.
Even worse, many elements of the judicial
systems that govern and de?ne our business
environment are so entrenched in illogical
processes that I am concerned that the
adverse changes are irreparable and will
hinder and harm the natural growth of markets
and businesses.

When I was a newly minted business
school graduate in 1979 and was pondering
a number of options for the start of
my career I was taken to dinner by a very
dear aunt. She listened to me talk about my
concerns and my dreams and left me with a
piece of advice that I have never forgotten.
She told me to never cheat on my expense
report with such easy actions as seeking reimbursement
for a business lunch that was
not really for business. At the time I thought
it was somewhat ridiculous and questioned
her logic. She answered with a question, Is
the value of your integrity worth the inappropriate
reimbursement that you receive?

That message stuck with me and I have
recalled it many times over the years. On
more than one occasion I was involved
in the termination of employees because
they either didnt have the bene?t of the
advice that I received or didnt listen to it.
My aunts logic was much more profound
than I realized at that time. What if I had
not heeded her advice? I may have begun
cheating on my expense report until I was
caught and summarily terminated. This
would have been a skeleton in my closet.
How would I have answered the question
of why I left an employer who caught my
fraud? Even worse, what if the ease of
this simple cheating led to more elaborate
schemes to unjustly enrich my personal ?nancial statements? Fortunately, I didnt have to experience this alternate path.

My aunt was a wise person. She possessed
lots of common sense clearly based
on her own established beliefs and values.
Common sense is based on simple beliefs
that have been proven over the ages and
passed from generation to generation. What
amazes me is the fact that these beliefs are
so enduring. Common sense can be, and
should be, used to formulate the basis of
good principles that de?ne our integrity.

The most bantered about business phrase
circulating today is Corporate Governance.
This has obviously emerged as a
result of the painful business experiences
that we have read about over the last ?ve
years. The question is; how did we get to
this? The emergence and common use of
the phrase Corporate Governance is an
admission of our failures.

In the 1970s and 1980s the philosophy
and teachings of W. Edwards Deming were
changing the business environment. Deming
showed us that mass inspection of the
products that we produce at the end of the
assembly line was not the way to achieve
quality. Deming wrote and prophesized
that quality had to be built into the processes
that feed into production including
design and purchasing. He also taught us to
improve every process as much as possible,
including the production process itself, to
achieve true quality. If these steps were
taken, he demonstrated that the quality of
the products would not need to be tested at
the end of the assembly line.

This simple common sense logic helped
United States businesses become more
competitive and better equipped to operate
in world markets. The Deming logic has
been extended to just about all elements of
business but it has ironically been lost or
not applied to the elements that have created
the emerging integrity crisis. We are once again applying the quality control process to the end of the assembly line with corporate governance actions such as the Sarbanes-Oxley legislation. How could we have allowed
such a lapse in our common sense?

Where Has Our Common Sense Gone?

It was Overshadowed by Compromised
Principles until it was Drawn

Our principles are the basis of our integrity. The formulation
of principles is one of the most important elements
of our personal characteristics that we should develop as
we prepare for a business career. Principles built on sound
qualities ease every business decision that we make in
our careers. If our principles are misguided or otherwise
unsound, they create shaky foundations for our business
careers and leave skeletons in our closets. A house built on a
shaky foundation will not stand the test of time.

We test our principles as we go about our lives using our
own experiences and the experiences of others. Unfortunately,
sometimes we have to look no further than our leaders
for examples of weak principles. In the 1990s we watched
our countrys President employ compromised principles in
the Monica Lewinsky ?asco. The form of his commitment
to his spouse was a personal decision for him to make but he
was not modeling the best principles for any generation and
particularly for our younger generation.

Later in my career, as I was involved in co-founding
and building Ariba, Inc., I was faced with the same form of
fateful decision that faced other executives of the time. Our
company achieved a leadership position and was presented
with a number of opportunities that came with that position.
Several times I was offered the opportunity to participate
in the initial public offering of stock of other companies
through friends and family shares from investment bankers.
In all instances I barely knew the management of the other
companies and could hardly be described as either friend
or family. As I re?ected on the ?rst offer I remembered
the advice of my aunt. It took me about a second to decline
the offer and I have never regretted that decision. These
offers would have given me some ?nancial reward but I
would only have received them because of my position at
Ariba, Inc. I proposed a policy to Aribas board of directors
that such offers could not be accepted by anyone under any
circumstances. This policy was immediately approved.

History has shown that accepting these offers would have
been a mistake because it would have caused all management
decisions to be questioned; particularly the decision of
who we selected as our investment bankers to manage our
own initial public stock offering. Later, when I read about
other business leaders in other companies who accepted
these offers (as part of the prosecution of some of the investment
bankers of the time) I was surprised by some of the
names. It doesnt portray an image of high integrity. I still
re?ect on it when I read about these people or have the occasion
to deal with them.

I was somewhat touched by Andrew and Lea Fastows
negotiations to ensure that their prison sentences would not
overlap so that one of them would always be available for
the rearing of their children. This sampling of their principles
doesnt correspond to the principles that allowed them
both to commit illegal acts and to harm so many investors
and employees of Enron.

There are many examples of people who had good
principles but ignored the common sense of following them,
which complicated business careers and ultimately led to
embarrassing punishment. Our common sense seems to be
forgotten and tired and does not seem to drive the decisions
of some of our business leaders.

Where Have Our Principles Gone?

They were Steadfast Until our Sense of
Responsibility was Withdrawn

If we admit our errors we demonstrate by leadership that
we understand them and have learned from their consequences.
In Gary Smalleys books about family values
and parenting he stresses the importance of admitting a
mistake to your children when you make one. I have used
this advice in the fourteen years that I have been a parent.
Last Fathers Day my wife encouraged our three children to
share the things that they admired about me as their father.
My eleven-year-old son noted that he valued my willingness
to come to him when I made a mistake and apologize for my
actions. The teaching from Mr. Smalley was a blessing to
me because it fostered respect from my son.

If given the opportunity to relive her life, I would bet
that Martha Stewart would make a different decision than
her now fateful mistake to trade-in the stock of ImClone
Systems. The investigation that followed suggested that
she traded-in this stock using insider information and attempted
to cover-up her actions, both of which are illegal.
This is even more troubling when you consider that she was
a member of the board of directors of the New York Stock
Exchange at that time. I would also bet that she has learned
that once an error is made, it is always the best course of action
to come forward and admit the wrongdoing rather than
to try to cover it up and create a tangled web of lies, which
is what ultimately did her in.

In the Monica Lewinsky scandal President Clinton
compounded the situation by lying in his interpretation of
what happened. The playback of his comments provides a
stunning example of how certain leaders work to avoid the
responsibility for their actions. Why would he lie? Was he
afraid of the legal implications of his actions? Ive often
wondered if he would have been respected more if he would
have told the truth at the beginning.

As business leaders we will make some bad decisions.
As entrepreneurs, we know that we will make errors and we
have developed skills to react to them and adjust our course
of action for the better interests of our companies. This is a survival and success tactic that has served entrepreneurs for
generations. Yet, with the recent wave of corporate scandals
we have initiated a judicial and regulatory process that
has no tolerance for any form of errors or mistakes and has
moved to maximize penalties. In a May 2004 interview New
York State Attorney General Eliot Spitzer stated there is a
zero tolerance standard one infraction of a real ethical mandate
and youre gone. There are no excuses, and there are no
explanations. It may sound harsh, but in order to recoup what
weve lost, we need to begin with this approach. With this
type of judicial and regulatory philosophy its no wonder that
we see leaders failing and avoiding to take responsibility for
their actions.

Where Has Our Sense of Responsibility Gone?

It was Litigated Until it was Foregone

The American legal system has disappointed and failed
our business process and this problem is growing every day.
While there are good aspects of any profession, our countrys
legal profession has a dark side that is as sinister as the
dark side in the original Star Wars movie trilogy. The large
plaintiff class action law ?rms have attacked businesses for
a number of years. Under the guise of being the advocate for
the common investor and protector of investor interests they
have built very large practices with one of the largest having
relieved various corporations or their liability insurers of $30
billion dollars over the last thirty years alone.

A closer look at the practices of one of these ?rms reveals
an interesting story. A recent study by one of the premier
business magazines noted that 80 percent of the time they
achieved damage settlements for their plaintiffs but that half
of the settlements are absorbed by their legal fees. That can
certainly provide for a life of club memberships, chartered
jets and private art collections similar to the lives of the corporate
executives that they loath.

This may seem like a successful and lawful practice on
the surface but when you look below you ?nd that federal
prosecutors are investigating the ?rm for illegally paying 10
percent kickbacks to one of the lead plaintiffs (a convicted
felon himself) in a signi?cant number of their class action
lawsuits, a practice that is illegal under state laws. By any
standard, that is a lot of money. If these allegations are true,
a ?rm that considers itself the champion of the individual
investor operates no differently than the allegations it throws
at corporations and management in countless actions.

The litigation chaos extends into the medical and healthcare
profession. The record high levels of malpractice
litigation and punitive damages have resulted in insurance
premiums for medical professionals at astronomical levels
and this is growing. I recently listened to an obstetrics and
gynecology physician who described how many extra hours
were required to pay for the additional insurance costs while
keeping his income constant. His days and weeks were growing
so long that he was concerned that fatigue and burnout would make him more likely to make a mistake. What an ironyhis long hours to pay for the insurance were increasing
the probability of creating an insurance claim. This
physician left his profession and is now working as a sales
representative in an unrelated profession.

This is a tragic irony that represents a deep departure from
common sense. If more doctors come to the same conclusion,
the remaining doctors will carry the burden of the
insurance premiums. This will result in much more than a
straw that breaks the camels back.

Even generalized litigation such as contract breech, property
damage or general claims have experienced the development
of protracted legal due process. Discovery continues
for years, multiple motions are ?led to choke the other party
and the courts, and as many parties as possible are dragged
into the battle to share possible settlement costs. All along
the way, the legal billing meter is running.

This is not justice or the honorable acceptance of responsibility.
It is the avoidance of responsibility through a broken
process of litigation. Anyone who has experienced litigation
understands why people and organizations spend lots of time
avoiding responsibility. As a result, we have reached a time
where the costs of litigation have caused businesses to fail,
have altered careers and have lost any semblance of common
sense.

A study of the German legal system in comparison to our
system shows some interesting differences. The German discovery
process is limited and focuses on the key facts instead
of the documents, photographs, transcripts from protracted
depositions, analyst reports and anything else that can document
damages. The German legal system controls damage
awards based on a well documented scale of damages resulting
from tort litigation in Germany rather than allowing each
trial judge and each jury to separately determine damages
(something that can be equated to gambling). For example, a
broken leg in a car accident in New York City might produce
a jury award of $300,000 however in Germany it would
result in an award of $30,000. Pain and suffering awards
are much lower in Germany than in the United States and
Germany doesnt recognize the concept of punitive damages.
Interestingly, Germans pay their lawyers much less than the
standard one-third of damage recovery contingency fee collected
by successful plaintiffs counsel in the United States.

All of these differences result in a lower volume of litigation
in Germany than in the United States. This translates
into lower costs to administer trials and also lower insurance
premiums. Imagine what would happen if we made one
simple change in the American legal system by requiring
both partys legal fees to be paid by the losing party in any
court trial or settlement? I am advised that merely eliminating
punitive damages would be a big step in the resolution
of the health care crisis that is looming on the horizon and is
very, very close to exploding.

Regretfully, the trial lawyers are one of the largest lobbying
groups in Washington DC. They have fought long and
hard to defend the American legal system because it provides so much opportunity for them to capitalize on the weaknesses
and common sense lapse.

Our legal system is broken and out of balance. We need
to take a tip from nature. Natural ecological systems, such
as the bio systems in a pond, are based on a balance of the
elements that are working together. Whenever one element
overpowers the other the impact will change the entire ecosystem
and will damage or kill multiple other elements and
even destroy the pond completely.

What is Left after the Litigation is Done?

Overpowering Regulations Where Once There
Were None

The ?nal indicators of lost common sense are the regulations
created in the wake of misplaced principles and failure
to take responsibility. W. Edwards Deming would turn over
in his grave if he saw how we used rules, regulations and
legislation to ?x problems at the tail end of the development
chain!

The Sarbanes-Oxley legislation has many bene?ts but it is
not perfect. It is intended to protect and help investors but it
has many affects that are counter to this purpose. It imposes
tremendous compliance burdens on companies. The costs
to maintain the type of corporate governance processes are
staggering. This is causing companies to explore the reverse
process of taking their companies off the public markets and
returning to their privately-held status to avoid the impact.
Perhaps even worse, many entrepreneurs who are looking at
the future of their companies no longer view offering their
stock for general public participation in an initial public
stock offering as a desirable goal. This will leave investors
with fewer alternatives when savvy management teams
choose to sell their companies to larger organizations as a
growth strategy rather than to offer their stock to the public
as a means to raise capital to grow their businesses.

We are similarly pelting rules and regulations on the area
of accounting for stock options. I have engaged in the discussion
of the common sense of the new practice of expensing
the non-cash charges and costs of incentive stock option
programs with a number CPAs, including some who serve on
the accounting standards boards that set the rules. Off the
record many would agree that this new requirement is a ridiculous
practice. These charges are based on Black-Scholes
assumptions and algorithms that result in calculations that assess
what the stock options are worth. They result in assumed
charges that are to be recorded in the ?nancial statements of
the companies that use stock options for their employees.

While using this calculation in the expensing of stock
options is theoretically correct, it results in ?nancial statements
that are dif?cult to understand. Non-cash charges, and
particularly the underlying calculations of the Black-Scholes
method, bear no relationship to the operations of the business.
The average investor who wants to understand how
much money the business is making will be confused. The professional analysts who track stocks will have access to
the management teams of the companies and can gain some
understanding of what is happening but the average investor
the person that the accounting standards boards are trying
to help is totally confused.
As the CFO of Ariba, Inc., I had to deal with non-cash
charges from stock options and Black-Scholes calculations.
Even the savviest Wall Street analysts asked me for simple
?nancial statements that took these charges out so that they
could see how we were really performing.
Sometimes we over-regulate our business environment to
the point of losing common sense. The United States legislature
made a decent attempt at addressing corporate integrity
with Sarbanes-Oxley but they didnt spend the time to get it
right and businesses are dealing with the shortcomings. W.
Edwards Deming would join me in wondering why we want
to do so much to over-regulate the impact of corporate and
management integrity issues and so little to address the root
cause.

Common Sense is Much too Uncommon

Sometime in his lifetime between 1694 and 1778 Voltaire
said that common sense is not so common. He may have
been ahead of his time or this issue may be an issue for the
ages. We should re?ect on this statement.

As business professionals we need to de?ne our principles
and consistently integrate them into our decisions. We should
never compromise our principles because they de?ne the
integrity that we are known by and that, more than anything,
is our best credential. With sound principles we will be leading
by example for the next generation of business leaders.
We will be doing the best that we can to protect investors and
keep the regulators and rule making bodies focused on issues
that build markets rather than on de?ning practices to police
them.

We need to instill a doctrine of taking responsibility and
de?ning principles and values in our business school curriculum
at both the graduate and undergraduate level. This
is as important as teaching the time value of money. So far,
there are few examples of business schools who have really
taken this seriously. Business schools should engage in ethics
case studies with serious hypothetical scenarios to explore
the impact of decisions and to understand the consequences.
They should also ?nd ways to integrate real life ethics examples
into the students college life to reinforce the issues.
This may be an opportunity for some of the executives who
have been engaged in scandals to add some value by accepting
invatations to classrooms to lead discussions of their
experiences and their errors. There is no better teacher than
experience.

As parents we are guiding our children into an endless
number of career choices and the development of principles
and values with the understanding that ethics and integrity is
important for all of them. I offer the following simple ideas
that will help children understand how important this is;

All of these things will be supporting the idea of putting
the quality control process for ethics, integrity, principles and
values at the beginning of the assembly line rather than the
need to install punitive actions and processes at the end with
litigation, regulation and punishment.
Oh, when will they ever learn?
Oh, when will they ever learn?

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